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Zacks Industry Rank Analysis is written by Sheraz Mian, Director of Research, Zacks.com.

Can You Bank on Regional Banks?

Four of the five regional groupings are all showing up in the top 1/3rd of all industries, meaning having a ‘Good’ outlook. The remaining one, banks in the Northeast, falls in the middle 1/3rd -- a ‘Neutral’ outlook. The ‘multi-regional’ group of large banks is also in the top third.

The Southwest region ‘industry,’ with 12 firms in it, is the strongest of the bank groups, coming in 11th place. Texas Capital Bancshares ((TCBI - Free Report) ) is a Zacks Rank #1 stock in this group. The Southwest group is the smallest of the regional groups and probably the reason it is the best regional grouping. Normally industries in the top 15 have fewer than ten firms in them.

Banks in the Midwest are the next best, in 15th place. The Midwest ‘industry’ has 35 stocks in it. Rosemont, Illinois-based Taylor Capital Group (), the $400 million market cap parent of Cole Taylor Bank, is one of the Zacks Rank #1 stocks in this group.

Banks in the West are at the 54th place, while the Southeast region is close to the cut-off for the top 1/3rd mark at 78th place. Banks in the Northeast are firmly in the ‘Neutral’ category at 126th place.

Lesser Known, but Not Lesser Investments

You probably have never heard of most of these banks. Some of them you might recognize if they happen to operate in your town, but it is a fair bet that the names of most of them are new to you.

None of the banks on either of the lists are large caps, and even the mid-caps are on the small side of the range. One could actually take a ‘package approach’ to investing in these banks. You can create a ‘synthetic’ national bank -- one that avoids the regional risk that these banks pose -- by having a portfolio made up of small positions in many of these names, rather than just taking one normal-sized position. Given the thin trading volumes in these names, even an individual investor could impact the price if they tried to take a big portion in just one of these names.

The valuations are for the most part reasonable; not rock bottom, but by no means excessive. And unlike the big boys of the banking world, most of these firms are free to pay whatever dividends their boards deem appropriate. As you can see, many of these small banks provide very attractive dividend yields. Dividends from some like Ohio’s FirstMerit Corp (), Virginia’s First Community Bancshares (), Kentucky’s Community Trust Bancorp ((CTBI - Free Report) ) are really juicy.

However, just as a word of warning, they tend to be thinly covered, so an individual analyst raising his or her numbers for the firm has a much bigger impact on the mean estimate than is the case with the big, well-covered banks. Still, higher earnings will allow these banks to pay higher dividends in the future, so if you do buy them and tuck them away, there is a very good chance that your yield on cost will be much higher a few years down the road.

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